Sunday, February 02, 2003

No Blood for Oil

I've avoided discussing the potential war with Iraq, plenty of other places on the web for that, but I will comment on the "No Blood for Oil" rallying cry popular with the far-left. Their argument is that the US just wants to attack Iraq because then it will take over its oil fields and give itself oil for free. Whatever the merits of their claim, it doesn't stand up well to economic scrutiny.

Suppose you live with your elderly aunt, who does not charge you rent. Suppose then that your aunt passes away, leaving you the house in her will -- are you still living rent free? The intuitive answer "yes -- I was paying nothing before and I'm paying nothing now" also happens to be wrong because it ignores opportunity costs. When your aunt did not charge you rent she was, in fact, paying it herself because she decided to forgo the income she could have received by renting it to someone else. Forgone income is as much a cost as expenditure -- money you decline to take is as unavailable as money you exchange for something else. But when the house passes to you, and you decide to continue living in it, then you are paying the opportunity cost by not renting it to someone else.

In the abstract, people don't think about opportunity cost, but in real life they act as if they do. The person who inherited her aunt's house may decide to sell it and move somewhere smaller, and perhaps plan to spend the money she would have left over on a car. This decision is taking opportunity cost into account, although the term never conciously comes up.

If the US took over Iraq's oil fields and then gave itself the oil for free, it would bear the opportunity cost of selling the oil to the world markets. Given that oil is a commodity product, this price would be exactly what the US would have had to pay for it anyway, whether it was in Iraq or not. There might be other benefits (and costs) that come from controlling the oil, but "getting it for free" isn't one of them.